Economy for the Week

"The price level for basic foodstuffs has been stable over the past five months... Beginning in August 1998 and until today prices have been comparatively stable," Hryhory Diakon, Head of the State Price Control Inspectorate, announced last week.

This will make any inquisitive reader wonder where to find at least one Ukrainian grocery store or bazaar where prices have been "stable over the past five months." Alas, he will find none, for there are none. They exist on paper, in some of the documents issued by Ukraine's ill-famed ministries and other cancerous bureaucratic formations. This presidential elections year seems to make the difference between the "statistical" and actual food prices even more dramatic. Incidentally, an anonymous Ministry confirmed this in an interview with the Ukrainski Novyny Agency (albeit not in so many words): "The political factor plays a certain role in the food price-setting process. Besides, the enterprises in the field would like to increase prices, but they cannot, considering the people's low buying power." So they cannot, can they?

In 1999, the wholesale price increment is planned to reach 15.7%, with 20% inflation, but real costs will obviously be higher. Late 1998 indices, according to First Deputy Minister of the Economy Viktor Kalnyk, speaking at a news conference on January 20, show 35.4% wholesale and 20.4% retail price increases. Mr. Kalnyk feared that wholesale prices will be ahead of retail ones, and with reason, attributing his fear to the "dollarization" of the economy. In fact, what is an established wholesale price today may well require an increment in our "retail" payments tomorrow. "Given the financial crisis, the dollar equivalent triggers off wholesale price jumps," he explains (i.e., considering that the triggering off is done by unprofitable production which, while consuming resources and budget subsidies, makes all this money spent on them "empty," thus stimulating inflation).

Obviously, the Cabinet has a different view on the situation, because on December 18, 1998, it passed a resolution ruling that all prices be in hryvnias. Accordingly, the government set hryvnia prices for goods and services previously valued in dollars like rail transport, natural gas transport, electricity, and those of a number of goods originating from the mining and steel sector. Yet experts at the Ministry of the Agroindustrial Complex saw no threat in this dollarization, just as they thought nothing of billions worth of losses sustained in previous years. They are still sure that there will be no sharp food price increase in 1999. Suppose we try to understand their reasoning.

In all likelihood, the main reason for the inalterability of "official" costs of agricultural products will be the unchangeable agribusiness performance. Last week the Cabinet declared it was going to cancel barter deals in this sector. On January 14, a working interdepartmental group on agrarian policy discussed the possibility of replacing barter contracts on material-technical supplies to agricultural producers with mutual exchange contracts. In particular, the Cabinet instructed the Ministry of the Agroindustrial Complex, Ministry of the Economy, Pension Fund, and National Exchange Association of Ukraine to introduce mutual contract vehicles, meaning that from now on purchase and sale contracts will be executed in the form of agrarian exchange contracts specifying the cost of goods, Viktor Andriyevsky told the working group.

In the meantime, the companies supplying material-technical resources are skeptical about such new vehicles. "Agricultural producers do not operate on exchanges for want of current assets," explains Anatoly Pidorych, deputy head of the Ukrahrobiznes (Ukrainian Agribusiness) Concern, and the man knows what he is talking about.

The reader should recall that agrarian exchanges were originally intended as a tool for the advance subsidization of agricultural production; agricultural producers would sell "planned" amounts of grain at an agrarian exchange in return for live money. Now that the agricultural producers cannot mortgage plots of land to receive low-interest bank loans, selling their future crops is the only source of pecuniary income in the countryside. In other words, access to real money is the main precondition for true progress in the agricultural sector. At the same time, it is the biggest threat to all those currently exploiting it.

Starting in 1994, the government has regularly spent between Hr 1 billion and Hr 2.5 billion on grain procurements, with the producers never receiving a singly hryvnia of the proceeds. Why? Because to receive money entities such as the state joint stock company Hlib Ukrainy (Bread of Ukraine) and Ukrahrotekhservis (Ukrainian Agicultural Technical Service) were set up, alongside quasi-private entities like the Slavutych Concern, et al. Money thus received would be further channeled in three directions: the purchase of fertilizer, machinery, and fuel, setting their costs in the countryside. Grain costs would also be determined by such intermediaries. Naturally, the costs would be overstated for the former and understated for latter, the inevitable result being that the countryside never has enough crops to make settlements with all those intermediaries at their gouging prices. But then agriculture's well-wishers invented yet another source of revenue by lobbying for debt write-offs.

Why, then forgive agricultural producers' debts if that same Hr 2.5 billion was never received by them? So they could get their profit twice.

Getting back to the agrarian exchange business. Its decline began precisely when it should have reached its apex. First people of means were lured to the exchange, promising them free exports of grain. A short while later (toward summer) the exchange's export licensing was canceled (instead local administrations were authorized to ban them at will, even though exports were by then officially free) and trade volume dropped abruptly. By 1997 a mere 1% of salable grain was been sold on agrarian exchanges. Toward the end of 1997 state contracts were nullified (being the leitmotif of regional restrictions) and the government promised to buy all grain on the exchange. This did not happen because the Cabinet preferred barter deals, so in 1998 such tenders were purely symbolic, as was, de facto state contract cancellation, because the state, represented by hand-picked intermediaries, continued to claim grain on account of resources and equipment provided. Expert estimates showed that such claims amounted to 10 million tons in 1998, 75% of all grain sold, or 1.7 times more than stipulated by the 1997 state contract.

Summing it all up, by 1999 the government, acting via friendly government-run and private entities, had regained full control over Ukraine's agricultural output, leaving the producers their work force and debts, while the customer had resources and commodity-monetary charts. Of course, one could dream of a new man at the head of agribusiness who would wish to introduce some innovations in the redistribution of roles. But what would he actually be able to do? Very little if at all, for a thousand of reasons like elections and prices, profits, and interests (see further), and finally due to one's own mentality with its persisting Soviet stereotypes of agricultural management.

Incidentally, last week made it clear that the newly appointed bureaucrat in charge of the agrarian sector is not going to change anything, except that maybe old business favorites will be replaced by new ones, because the pattern of "cooperation" with agribusiness will remain the same.

Take a simple example. A Cabinet resolution of December 10, 1998, envisions 2 million tons of Ukrainian tons to be allocated for the 1999 output, along with 500,000 tons of gasoline, and 620,000 tons of diesel fuel for agribusiness. At the same time, supplies are expected to be made via the Ahronaftoprodukt (Agricultural Oil Product) network of government-run companies set up based on regional organization departments of the Ukrahrotekhservis Concern. By way of comparison, non-government companies supplied 2,141 tons of fuel to agricultural enterprises, the private-government-list topped by Hlib Ukrainy. Now this company is being watched closely by the Antimonopoly Committee and Clearing House.

The reader may wonder, of course: why do food prices remain so relatively low, considering that their actual cost is made up of staggeringly expensive imported resources, monopolies' excess profits, and unrecoverable losses incurred by the incompetent managers of collective farms? There are two reasons. First, food prices are a political issue (low prices for a poverty-stricken populace and making businessmen pay for any profits made "on the side" are a must under the circumstances). Secondly, one must not forget that the rural proletarians work for their Red lords for practically nothing.

By Iryna KLYMENKO, The Day